Oil Markets Ignore A World On The Brink Of War

U.S.-Iran tension continues to rise over the attacked tankers in the Gulf of Oman, but oil traders no longer seem to be paying attention.

U.S. Secretary of State Mike Pompeo hit the cable news circuit over the weekend to blame Iran for the tanker attacks and to drum up support for more aggressive measures to isolate the Iranian government. The Pentagon also released new photos to bolster its case that Iran was behind the attack.

However, many experts say the evidence is insufficient to jump to any conclusions. The head of the UN called for an independent investigation to get at the truth, a move that won plaudits from other governments around the world. “It’s very important to know the truth and it’s very important that responsibilities are clarified. Obviously that can only be done if there is an independent entity that verifies those facts,” United Nations Secretary-General Antonio Guterres told reporters on Friday.

Both U.S. and Iranian officials have said that they do not want war, but they seem trapped in a cycle of escalation. Iran said on Monday that its uranium enrichment would breach limits set out in the 2015 nuclear accord and called on Europe to help it circumvent U.S. sanctions. After the Trump administration withdrew from the nuclear deal last year and imposed several rounds of sanctions, Iran has been unable to access any of the upside of the nuclear deal while still being confined to its terms.

The Trump administration is betting that by backing Iran into a corner and forcing it to violate the terms of the deal, it can paint Iran as the villain, a strategy that might yet bear fruit. Just as American foreign policy is being driven by hardliners, the cycle of conflict benefits hardliners in Tehran. As each side ups the ante, any possible off ramp from the conflict becomes increasingly out of reach.

While most of Europe has been at odds with Washington over the nuclear deal, even going as far as trying to setup a special financial entity to allow European companies to do business with Iran, some European officials are beginning to believe that they may struggle to keep the nuclear accord alive.

Iran wants Europe to buy its oil, but because the EU cannot, Iran may begin to exit the nuclear deal. “Since Europeans cannot do this without violating the US sanctions, there is a risk that the nuclear agreement will break down,” Commerzbank wrote in a note. That, in turn, offers a pretext for the Trump administration take the next escalatory move.

Just this week, German Chancellor Angela Merkel warned the Iranian government not to violate the terms of the deal. “We are pushing for Iran to keep to (the nuclear pact) - if that is not the case, there will of course be consequences,” Merkel said.

With all of that said, the U.S. government clearly has internal disagreement on its own policy towards Iran, leading to confusion and mixed messages. National security adviser John Bolton has consistently called for regime change, while the Trump administration has denied that was the official policy. Secretary of State Mike Pompeo has taken a slightly more nuanced position, which calls on Tehran to change its behavior. However, Pompeo’s strategy would seem to inevitably lead to regime change as well since it entails a list of a dozen demands that Iran cannot possibly entertain.

Meanwhile, Trump himself appears less eager for war. He sent a message through Japanese Prime Minister Shinzo Abe for Iran’s Supreme Leader Ayatollah Ali Khamenei. Presumably, Trump was inquiring about negotiating, something that Khamenei dismissed.

Most recently, however, Trump downplayed the tanker attacks, the very incident that seems to be pushing both sides closer to conflict than ever. In an interview with TIME, Trump said that the tanker attacks were “very minor,” although he added that he was much more concerned with the nuclear program.

He said that while he thinks Iran was behind the tanker attacks, he sees Iran as less confrontational towards the U.S. than they were under the Obama administration. That characterization certainly is at odds with the line from his Sec. of State and his national security adviser.

When asked whether he was considering military action against Iran, Trump told TIME, “I wouldn’t say that. I can’t say that at all.”

And yet, without any plan for negotiations, the odds of conflict are uncomfortably high. “The US and Iran are each accusing the other of being behind the attacks. Meanwhile, the US has sent another 1,000 troops to the crisis region. Though neither side wants any military confrontation, the possibility of this happening nonetheless – through carelessness or a series of unfortunate circumstances – cannot be ruled out entirely,” Commerzbank wrote in a note.

However, aside from an initial price spike last week following the tanker attacks, oil prices have barely noticed. In fact, prices jumped on Tuesday, moving up nearly 4 percent during midday trading. The reason? Trump tweeted that he and Xi Jingping were set to meet on the sidelines of the G-20 summit, raising hopes of a breakthrough in the trade war.

The U.S. and Iran are at the precipice, but global financial and commodity markets are much more concerned with economic recession.